Mullan was born in Peterhead in the northeast of Scotland. He was the fifth child of eight born to a devoutly Roman Catholic mother (of Irish extraction) and a Scottish father. The family moved to Cardonald, a working class suburb on the south side of Glasgow where Mullan's father worked as a tool-maker and lab technician. An alcoholic and latterly a sufferer from lung cancer, Charles Mullan became increasingly tyrannical and abusive. When he was 14, Peter tried to poison him with sleeping pills. For a brief period, Peter was a member of a street gang while at high school, and worked as a bouncer in a number of rough south-side pubs. His father died on the day Peter started his studies (in economic history and drama) at Glasgow University.

At University, Mullan began acting, and continued stage acting after graduation. He had small roles in several Scottish films, including Shallow Grave, Trainspotting, Braveheart, On a Clear Day and a supporting role in Ken Loach's Riff-Raff. He also began to work as a writer and director, producing the short films Close, Good Day for the Bad Guys, and Fridge. His first full-length film Orphans won an award at the Venice Film Festival.

Mullan's appearance in Loach's 1998 film My Name Is Joe, portraying a recovering alcoholic wrestling with his demons, won him the best actor prize at the Cannes Film Festival. He appeared in a prominent role in Brad Anderson's 2001 psychological/supernatural thriller Session 9. In 2002 he returned to directing and screenwriting with the controversial film The Magdalene Sisters, based on life in an Irish Magdalene Asylum. For that movie Mullan won a Golden Lion award from the Venice Film Festival. In 2006 he featured in Children of Men, a thriller directed by Alfonso CuarĂ³n, and will star as the Irish freedom fighter James Connolly in the upcoming movie Connolly.

A Marxist, Mullan was a leading figure in the left-wing theatre movement which blossomed in Scotland during the Conservative Thatcher government, including stints in the 7:84 and Wildcat theatre companies. He campaigned for the Scottish Socialist Party during the 2005 general election, and is a close friend of former SSP convener Tommy Sheridan. In July 2006, Mullan lent his support to Tommy Sheridan during the latter's libel trial against the News of the World. He is a strident critic of Tony Blair's New Labour government, telling The Guardian "the TUC and the Labour Party sold us [the working class] out big style, unashamedly so."

Mullan has three children with actress and scriptwriter, Annie Swan. Since September 2006, he has been in a relationship with human rights campaigner Robina Qureshi.